Heinz Takes on Heavy Load

H.J. Heinz Co.’s incoming bosses say their plan isn’t necessarily to start slashing costs. But the heavy debt load that they are taking on to do the $23 billion deal may leave them little choice.

3G Capital, the Brazilian private-equity firm that is buying the ketchup maker along with Warren Buffett’s Berkshire Hathaway Inc., will be in charge of operations and has a history of quickly cutting costs and moving to pay down acquisition debt.

The buyout will more than double Heinz’s debt to over $12 billion and is likely to cost the company its investment-grade rating. In addition, Heinz will sell $8 billion in preferred stock to Berkshire Hathaway to help fund the deal. Interest on that debt, along with the 9% dividend on the preferred stock, will chew up much of the company’s cash flow.

3G managing partner Alex Behring said Thursday that the firm hadn’t determined whether major cost-cutting would be needed but said Heinz was in better shape than others it had taken over.

“We’re just getting involved and have several months ahead of us to get to understand the team and the people,” he said.

Heinz generates about $2 billion a year in earnings before interest, taxes, depreciation and amortization, a proxy for the amount of cash the company brings in. Debt analysts estimate that annual interest on the company’s bigger debt load could come to roughly $700 million. Heinz will have to pay another $720 million a year in dividends to Berkshire Hathaway.

That will leave somewhere around $600 million a year to cover capital expenditures, day-to-day cash needs and taxes, said Edward Mui, an analyst at debt research firm CreditSights.

Heinz declined to comment on the figures.

The food company, however, said the acquisition follows a string of 30 quarters of growth in sales, excluding acquisitions and currency moves, demonstrating that Heinz is already in good shape.

“The company is being acquired for the purposes of taking it private and using it as a platform for future global growth,” spokesman Michael Mullen said.

Fitch Ratings cut Heinz’s credit rating three notches to BB-plus, in junk territory, citing the heavy debt load. Moody’s Investors Service and Standard & Poor’s have said they are reviewing Heinz for ratings downgrades.

3G hasn’t dallied in previous deals to cut costs to make its debt load more bearable. The firm’s last big buyout was a $3.3 billion deal for Burger King in 2010. A few weeks after taking over, the firm’s management team fired about half of the 600 employees at the company’s Miami headquarters, got rid of the building’s executive wing and made employees get permission to make color printouts, people familiar with the matter said.

One large Burger King franchisee said that so many managers at the corporate headquarters have been laid off that there is no one to call when there is a problem. Meetings are conducted via webcast as a way to save money, and it is rare to meet people from the head office in person, the franchisee said.

Former Burger King executives said managers used principles from a book by consultant Bob Fifer called “Double Your Profits in 6 Months or Less.” One of the book’s chapters is called, “Cut Costs First, Ask Questions Later,” while another is “No Cost is Too Small to Worry About.”

Burger King spokesman Miguel Piedra said the number of corporate employees shrank because the company wanted to add field managers to work with restaurant operators in the field.

“We’ve shifted from being a very corporate-focused population to being a field-based population,” he said, explaining that the company has more than doubled the number of field positions.

3G, which has offices in Rio de Janeiro and New York City, has cut Burger King’s operating costs by 30% since acquiring the company. On Friday the chain reported that its fourth-quarter profit doubled and cash flow excluding currency moves and franchising changes improved.

Burger King has also introduced new products, adding smoothies and snack wraps to its menu, at a cost of more than $30,000 per restaurant—borne by franchise owners in many cases. It has also launched a restaurant remodeling campaign and embarked on a refranchising strategy in which corporate-owned locations are sold to franchisees.

The moves 3G makes to improve performance at Heinz could put pressure on rivals to do the same. And with the firm seeing Heinz as a platform to do more food deals, the “floodgates are open” for more consolidation in the food industry, Barclays analyst Andrew Lazar said.

In a note to investors, Mr. Lazar said the Heinz deal “likely puts even more pressure on [food companies] to rethink their focus on growth versus cash flow generation.”

Mr. Buffett has long taken a different approach with acquisitions, typically leaving management teams intact at the companies he buys. The Berkshire chairman and 3G have promised to maintain Heinz’s Pittsburgh headquarters, but beyond that it is unclear what changes may be ahead for the company.

Heinz Chief Executive William Johnson said Thursday that it was too early to say what impact the ownership change might have on the company’s employees, 1,200 of whom are in Pittsburgh.

Heinz Takes on Heavy Load

H.J. Heinz Co.’s incoming bosses say their plan isn’t necessarily to start slashing costs. But the heavy debt load that they are taking on to do the $23 billion deal may leave them little choice.

3G Capital, the Brazilian private-equity firm that is buying the ketchup maker along with Warren Buffett’s Berkshire Hathaway Inc., will be in charge of operations and has a history of quickly cutting costs and moving to pay down acquisition debt.

The buyout will more than double Heinz’s debt to over $12 billion and is likely to cost the company its investment-grade rating. In addition, Heinz will sell $8 billion in preferred stock to Berkshire Hathaway to help fund the deal. Interest on that debt, along with the 9% dividend on the preferred stock, will chew up much of the company’s cash flow.

3G managing partner Alex Behring said Thursday that the firm hadn’t determined whether major cost-cutting would be needed but said Heinz was in better shape than others it had taken over.

“We’re just getting involved and have several months ahead of us to get to understand the team and the people,” he said.

Heinz generates about $2 billion a year in earnings before interest, taxes, depreciation and amortization, a proxy for the amount of cash the company brings in. Debt analysts estimate that annual interest on the company’s bigger debt load could come to roughly $700 million. Heinz will have to pay another $720 million a year in dividends to Berkshire Hathaway.

That will leave somewhere around $600 million a year to cover capital expenditures, day-to-day cash needs and taxes, said Edward Mui, an analyst at debt research firm CreditSights.

Heinz declined to comment on the figures.

The food company, however, said the acquisition follows a string of 30 quarters of growth in sales, excluding acquisitions and currency moves, demonstrating that Heinz is already in good shape.

“The company is being acquired for the purposes of taking it private and using it as a platform for future global growth,” spokesman Michael Mullen said.

Fitch Ratings cut Heinz’s credit rating three notches to BB-plus, in junk territory, citing the heavy debt load. Moody’s Investors Service and Standard & Poor’s have said they are reviewing Heinz for ratings downgrades.

3G hasn’t dallied in previous deals to cut costs to make its debt load more bearable. The firm’s last big buyout was a $3.3 billion deal for Burger King in 2010. A few weeks after taking over, the firm’s management team fired about half of the 600 employees at the company’s Miami headquarters, got rid of the building’s executive wing and made employees get permission to make color printouts, people familiar with the matter said.

One large Burger King franchisee said that so many managers at the corporate headquarters have been laid off that there is no one to call when there is a problem. Meetings are conducted via webcast as a way to save money, and it is rare to meet people from the head office in person, the franchisee said.

Former Burger King executives said managers used principles from a book by consultant Bob Fifer called “Double Your Profits in 6 Months or Less.” One of the book’s chapters is called, “Cut Costs First, Ask Questions Later,” while another is “No Cost is Too Small to Worry About.”

Burger King spokesman Miguel Piedra said the number of corporate employees shrank because the company wanted to add field managers to work with restaurant operators in the field.

“We’ve shifted from being a very corporate-focused population to being a field-based population,” he said, explaining that the company has more than doubled the number of field positions.

3G, which has offices in Rio de Janeiro and New York City, has cut Burger King’s operating costs by 30% since acquiring the company. On Friday the chain reported that its fourth-quarter profit doubled and cash flow excluding currency moves and franchising changes improved.

Burger King has also introduced new products, adding smoothies and snack wraps to its menu, at a cost of more than $30,000 per restaurant—borne by franchise owners in many cases. It has also launched a restaurant remodeling campaign and embarked on a refranchising strategy in which corporate-owned locations are sold to franchisees.

The moves 3G makes to improve performance at Heinz could put pressure on rivals to do the same. And with the firm seeing Heinz as a platform to do more food deals, the “floodgates are open” for more consolidation in the food industry, Barclays analyst Andrew Lazar said.

In a note to investors, Mr. Lazar said the Heinz deal “likely puts even more pressure on [food companies] to rethink their focus on growth versus cash flow generation.”

Mr. Buffett has long taken a different approach with acquisitions, typically leaving management teams intact at the companies he buys. The Berkshire chairman and 3G have promised to maintain Heinz’s Pittsburgh headquarters, but beyond that it is unclear what changes may be ahead for the company.

Heinz Chief Executive William Johnson said Thursday that it was too early to say what impact the ownership change might have on the company’s employees, 1,200 of whom are in Pittsburgh.